Reader Question: Which Account for Canadian Index ETFs?

It’s been a while since I’ve posted reader questions (and answers) on this site but I’m going to start posting them again. This time around, the question revolves around tax efficiency, specifically, which account to use for Canadian index ETFs.

Where to put Canadian index ETFs?

I was wondering about Canadian index ETF’s such as XIU would be a fit for Non-Registered accounts? I know you said Canadian Dividends work for non-reg accounts, so can ETF’s which hold Canadian Companies benefit it as well?

This question stems from the article Portfolio Allocation where I discuss the most tax efficient account to place your investments. In terms of the ultimate tax efficiency, it’s best to keep everything in tax sheltered accounts (RRSP, TFSA, RESP). If you have the room available in tax sheltered accounts, it can be further broken down into US/international equities for RRSP, and Canadian equities/REITs for TFSA.

However, for those with their tax sheltered accounts maxed out and with extra cash to invest, that’s where non-registered accounts are put into action. To answer the reader question, because Canadian dividends are tax efficient, I personally keep most of my Canadian equities in non-registered accounts. In fact, Canadian dividends are so efficient that an investor can receive up to $45k in eligible Canadian dividends and pay $0 in income tax in most provinces (assuming no other income) – however, alternative minimum tax may apply.

The question specifically asks about Canadian index ETFs, like XIU. First thing to do is check their website to see the contents of their distribution. If it’s purely dividends, like XIU, then the dividends are eligible for the Canadian dividend tax credit which is tax efficient. If the ETF distribution includes interest, which is taxed at your marginal rate, then it may be best to keep it in a tax sheltered account.

So, yes, XIU is a tax efficient ETF that is a fit for a non-registered account.

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

I think a great post would be to compare the relative tax efficiencies of holding various CDN ETFs non-registered. I suspect many Canadians are wary of this, but shouldn’t be really, because of the DTC.

XIU, XDV, ZDV, VDY and a few others come to mind, vs. holding a broad-market CDN ETF like XIC or ZCN.